As August Looms, Be Afraid, Be Very Afraid

Economic policymakers will be forgiven for looking forward to taking a break in August, the traditional month for a mental switch-off, this year.

A financial explosion in Greece triggering the country’s exit from the single currency has just been averted. On a more minor note China’s stock market collapse and heavy-handed response by the Beijing authorities are no longer on the front page even of the financial papers. The US can bask in the positive reception to the nuclear deal with Iran that it brokered.

And back in Blighty, Conservative ministers can start to pack their suitcases, confident in the knowledge that they have got the  £12 billion of welfare cuts laid out in the “emergency” Budget past MPs and the media while Brits flock to Europe to take advantage of a pound that buys €1.50.

But if there is one thing we have learned since the onset of the global financial crisis  is that August can be the cruellest month. The crisis itself began in August 2007 when BNP Paribas bank froze three funds saying it had no way to value the complex financial products.

if there is one thing we have learned since the global financial crisis is that August can be the cruellest montAs investors took fright and withdrew from the financial markets, a credit crunch ensued, starting a domino effect that by the end of the year had seen the first run on a British bank — Northern Rock — for 150 years.

The world had August off in 2008 although only to give it time to prepare for the failure of Lehman Brothers the following month, while 2009 was the calm before the storm in the wake of the $1.1 trillion injection of cash at the April G20 summit.

Then in 2011 August came in its own with turmoil on the financial markets as the United States lost its precious AAA credit rating triggered crash on Wall Street. Stock markets tumbled in sympathy across Europe, prompting the authorities to impose bans on short selling — borrowing shares in order to sell them and then buy them back.

Of course there have been some good years. August 2012 saw a strong run in world stock markets after the president of the European Central Bank, Mario Draghi, said he would do “whatever it takes” to defend the euro.

The last two summers have been dominated by the crisis in Russia and Ukraine and the onslaught of Islamic State across the Middle East which might have disrupted the markets more in 2014 had it not been for the sudden and unexpected collapse in world oil prices.

Old-timers will recall it was in August 1990 that Saddam Hussein invaded Kuwait, beginning the train of events that led to the first Gulf War while historians will point to the outbreak of World War One in August 1914.

Top of the list of “known knowns” is Greece

The reason that August is vulnerable is that many senior financial traders and leading figures in governments and international organisations are more likely to be on holiday. If something blows up suddenly — as happened in 2011 when riots tore through London — it may take the top people time to get back to the control room.

So what might trigger an upset next month? Top of the list of “known knowns” is Greece. Creditors aim to finalise the bailout talks by 7 August, by which time they hope that Athens will have passed all the laws needed to put the rescue plan in motion.

The first tranche of the new funds would be distributed on 17 August in time for Greece to make a €3.2bn bond repayment to the ECB. Given the agonising six months it has taken from the election of Syriza in January to get to this stage there is no guarantee this will happen. The consequences would be horrendous.

A key “known unknown” is the possibility of an event that would trigger a surge in the oil price. Analysts have started to speculate that the oil price may be due for a rebound after staying low for so many months.

Finally there are the “unknown unknowns” about which no one can have any real clue about until one of them arrives. One worry was that is a shock came it would contrast with the eerie feeling of calm in the markets: the CBOE Vix index — Wall Street’s so-called “fear gauge” — is close to its lowest this year.

But before we all panic and run for the hills it is worth bearing in mind Mark Twain’s (paraphrased) offering: “August. This is one of the peculiarly dangerous months to speculate in stocks. The others being July, January, April, November, May, March, September, June, December, October and February.”

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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